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From Site Selection magazine, November 2022

Evolving Incentives For Today’s Priorities

San Jose created an equity-focused Microenterprise Grant Program using $2.5 million of its CARES Act Community Development Block Grant funding, used targeted outreach to reach high-poverty neighborhoods and awarded 61 grants totaling $915,000.
Photo of Cesar Chavez Park courtesy of San Jose Convention & Visitors Bureau

by Ellen Harpel and Darrene Hackler

ncentives are being pulled in new directions to advance economic development priorities. A common thread is a greater focus on creating benefits for people and places.

Economic development leaders and policymakers continue to face challenges stemming from the pandemic, an uneven recovery and an uncertain economic future. Federal recovery and investment programs that are part of the American Rescue Plan, the CHIPS and Science Act and the Inflation Reduction Act are intended to benefit communities all across the country. State and local governments are assessing relief efforts and looking at their economic development programs to determine if they are creating the hoped-for benefits for their residents and communities.

Business incentives and financing programs are part of many of these efforts and, naturally, are at the top of the list for review. Tallies of business wins, jobs and investment are increasingly considered insufficient justification for incentives in the absence of other measurable benefits to residents and communities.

In response, incentive and financing programs are increasingly being geared to address economic development goals related to community priorities such as local small business support, workforce skills development and career opportunities for residents, and greater equity and inclusion, among others. Economic development organizations are also improving their ability to describe how their incentives benefit people and places, as well as businesses.

Reflecting Community Priorities

A central question remains how state and local economic developers and policymakers can adapt their economic development efforts to be more responsive to community needs. The unprecedented infusion of economic development investment funding provides an opportunity to engage the community and local businesses in an intentional process of determining priorities and identifying where gaps and needs exist. With greater awareness of a community’s priorities and challenges, economic developers can design responsive programs with interconnected and long-term strategies to increase equitable and inclusive growth.

State and local economic development groups that previously prioritized community engagement to determine priorities and clearly linked that engagement to actionable initiatives with measurable results are now in a better position to leverage these investment opportunities.

Our work, “Reflecting Community Priorities In Economic Development Practices,” profiles several of these cities and regions and shares guidance on how they use Determine-Design-Evaluate methods (see diagram) to craft investments that are meaningful to residents and communities as well as businesses. Using these methods, economic development organizations or other community leaders improve their community engagement activities with an eye toward establishing more equitable and inclusive practices to help determine priorities meaningful to residents. Programs can then be designed or co-created so that they are more responsive to community goals. Evaluations are built around measures that reflect outcomes that matter to the community, as well as basic program and output metrics.

For example, cities ranging from Fresno, California, to Atlanta, Georgia, created new engagement processes to bring more voices representing a fuller range of city residents, community leaders, and businesses into economic development conversations. These voices stressed the importance of connecting more city residents to quality jobs and prioritizing business attraction that creates work opportunities for city residents. Scorecards, dashboards and performance indicators are being updated to reflect progress in meeting these priorities.

Benefiting Residents and Communities

The pandemic showed just how important small local businesses are to our economies and communities. Policymakers at the local, state and federal levels created new incentive, finance and technical assistance programs to support this hard-hit sector. This year’s update of C2ER’s State Business Incentives Database revealed a decline in total incentive programs but growth in grant, direct business financing and capital access programs, many of which are designed to help small businesses.

Many of these government responses specifically addressed the pandemic’s inequitable impacts. “COVID-19 and Entrepreneurial Firms: Seeding an Inclusive and Equitable Recovery,” prepared by Smart Incentives and the Kauffman Foundation, highlights inclusive and equitable programs and processes that are underway to tackle the struggles of businesses owned by Black, Indigenous, or People of Color (BIPOC), businesses owned by women, and businesses owned by individuals in historically under-resourced communities.

Once again, those economic development organizations that had taken time to build working relationships across their entire small business sector were in a better position to respond quickly to business needs. They built trust and awareness, and they designed programs so that previously underserved businesses were able to access the assistance available to them. Surveys, participant feedback and reporting metrics provided feedback loops for ongoing program improvements and indicated the degree of progress toward agreed-upon objectives.

Workforce development incentives are also evolving. The State Business Incentives Database update found nearly 300 state-level programs focused on the education, training and recruitment of workers. Most of these incentives are structured as tax credits or grants. Programs frequently cover skills training or retraining and work-based learning opportunities, including apprenticeships. New this year, the update also determined that approximately 10% of workforce development programs seek to address individual barriers to employment, such as having a disability, criminal history, or recovery from substance abuse. These are all great examples of incentive programs that benefit residents, the communities where they live and businesses.

Evolving Business Incentives

The incentives included within the federal CHIPS and Science Act of 2022 reflect all of these themes. A tremendous amount of incentive money — $39 billion — is available to support domestic semiconductor manufacturing. Companies will have to do more than build a facility in order to access the incentives. Applicants for CHIPS funds must describe collaborations for building out semiconductor industry ecosystems, establish partnerships and initiatives to expand the workforce pipeline that will be inclusive of populations that have been underrepresented in the industry, and demonstrate how small and underrepresented businesses will be included in projects.

The CHIPS Program Office will be responsible for monitoring use of funds and required reporting on program use and outcomes.

Smart incentive use is always about reaching economic development goals, not just completing a transaction. These new approaches to deploying incentives strengthen the connection between business-oriented economic development and residents and communities. Evolving metrics help tell the story of how business incentives support the economic development mission and assure that people, businesses and places are better off.

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